Part of raising children involves teaching them to be financially responsible starting at an early age. Today, many parents believe that investing is a key element of financial responsibility and wonder how they can help their children learn the basics. Teaching children about investing is a great way to round out their financial education and ensure that they make good decisions with their own money as they grow older.
To teach children about investing, parents must do much more than give them a bit of money and tell them to choose stocks. After all, if the stocks then plummet, children could draw the conclusion that investing is a waste of money. If the stocks go up, the children may become overconfident and make risky financial decisions. Therefore, parents need to focus on the bigger picture of investing, from setting goals and maintaining realistic expectations to vetting different investment options.
The following are some tips for teaching children about investing at different stages of their development:
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In preschool, explore the concept of future rewards.
Investing is all about reaping rewards in the future. To instill this concept in young minds, parents can get the classic book The Little Red Hen, which is about investing both time and effort to create bread from wheat. The book goes through the entire process, from sowing to baking, including the other animals who think the hen is crazy for her work until the bread comes out of the oven. The story teaches the value of long-term thinking.
Parents can reinforce the concept of long-term thinking when the child starts working on larger projects, such as a solving a puzzle or even growing plants from seeds. By calling these tasks investments, parents can reinforce the necessity of a long-term vision while also showing that investment can take many different forms. Certainly, putting a puzzle together is different than planting tomato seeds, and likewise the reward from each is different.
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In elementary school, introduce the idea of diversification.
Children in elementary school can comprehend much more complex ideas than most parents think, but these ideas need to be broken down into digestible pieces. Ask elementary schoolers to imagine a restaurant that sells only chicken fingers. This idea will probably get children very excited until parents ask them what happens when they want fries with the chicken fingers. There is another restaurant down the road that sells both, so which would they choose?
But what happens if a disaster hits local chicken farmers and the meat supply is temporarily halted? Where do we eat then? Luckily, there is restaurant a couple of miles away that serves fries, chicken fingers, and hamburgers! Although these scenarios are silly, they show young children how important diversification is. The most diversified restaurant is also the most stable one.
This scenario is also a great way to introduce the idea of stock as owning part of a company. If the child could own any restaurant, which would it be? Then, introduce the companies that are actively involved in the child’s life, such as Coca-Cola and Disney. These firms need money to make their products, and they make that money by selling a piece of the organization.
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In middle school, introduce some investing mathematics.
Middle schoolers have the mental capacity to understand much of the more complex math that goes into investing, such as compounding returns. Many students will learn about compounded interest in their math classes, and students can show how this concept can work in their favor with investing. Investor.gov has a great tool that lets children calculate earnings and seeing how much money they would have at their parents’ age if they started setting aside $5 a month now.
At this age, children may also enjoy learning about the rule of 72. By dividing 72 by the rate of return earned by money, you can calculate how many years it will take to double the initial investment. This sort of rule makes the returns of investing real and can get children very excited to learn more.
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In high school, actively involve children in investing.
Once kids are in high school, they are ready to make some investing decisions. If the child has a part-time job, help him or her open a Roth IRA to begin saving for retirement. Opening the account helps the child learn about different ways to save for retirement and the benefits and drawbacks of each different vehicle. Help kids explore the different options for investing, such as an index mutual fund or an index exchange-traded fund. The best option will depend on how much money the child has to invest, but the most important part is going through the different structures and allowing him or her to ask relevant questions.
Parents may also want to introduce the idea of socially responsible funds, especially for children that seem to need more motivation to get interested in investing. These funds invest in socially responsible ways by avoiding certain industries or focusing on companies that have a good track record with their employees. Children may get more excited if they feel that their investment is having a positive impact on the world.